Given the long gestation of seed deals, venture capital firms look for clean-technology projects with federal or academic support
Earlier this week, 35 venture capitalists wandered the halls of the National Renewable Energy Lab in Colorado. They were attending a conference focused on commercializing the clean technology that comes out of national labs, learning how to scope out the taxpayer-funded research that may one day become the next big battery or solar company initial public offering. But given the amount of time it takes to bring research from the lab to the stock market, they'd better be prepared to wait.
When it comes to scouting for cleantech deals, VCs are increasingly turning to academia and federally funded research. In February, the Energy Dept. and several big-name venture firms, among them Kleiner Perkins Caufield & Byers, announced an entrepreneur-in-residence program designed to pull clean technology out of national labs.
But such deals are green in another sense, in that they involve young, unproven companies and technologies. In many cases, venture firms are investing small amounts in seed deals and commercialization efforts that force them to take on significant engineering risk, where the basic science can't even be melded into an appropriate product yet. These deals tend to take a decade or more to achieve an exit—significantly longer than the five to seven years for which most VCs plan.
Such commercialization efforts have been funded at the rate of one or two deals a year since the beginning of this century—generally by firms experienced in tech transfer, such as ARCH Venture Partners or Battelle Ventures—but that pace has quickened in the last year and a half. In fact, a little more than half of the seed-stage deals for cleantech funds since 2000 have been inked in the past 18 months, according to the most recent MoneyTree Report, which is jointly authored by the National Venture Capital Assn., PricewaterhouseCoopers, and Thomson Reuters (TRI).
Given the long time frame, such deals represent both the greatest risk and greatest potential reward for VCs. Earlier this week, the NVCA released data that made clear that when measured at both the 10-year and the 20-year mark, seed investments generated the highest returns.
But not everyone is prepared to take on the risks involved with such a long timeline, including Tucker Twitmyer, a managing partner with Enertech Capital, which has been investing in clean energy for 12 years. Enertech is also an adviser to Battelle, a company that manages some of the national labs and is the sole investor in Battelle Ventures. But while Twitmyer says he sees the value in pulling technology out of the lab, as far as Enertech is concerned, it simply takes too long.
"Seed-stage investing where there is significant development needed has put too much time pressure on our return profile," Twitmyer says. "It takes a long time to get those companies to revenue. We prefer to pick those up in the early stage, where there is some level of maturity around the company and product."
However, he notes that many of the cleantech deals getting funded today, including those in Enertech's portfolio, have ties to research done at national labs and universities. A look at recent funding bears this out. In July, Innovalight, which makes photovoltaic ink, raised $5 million in equipment lease financing from ATEL Ventures, and battery startup ActaCell raised $5.8 million in first-round financing led by DFJ Mercury. Both companies are based on technology commercialized from the University of Texas at Austin. Also in July, Wakonda Technologies, which is commercializing solar technology from the Rochester Institute of Technology, received $9.5 million from Advanced Technology Ventures, General Catalyst Partners, Polaris Venture Partners, and Applied Ventures.
Innovalight, which is the oldest of those companies and furthest along the path to an IPO or exit, drew VC attention for the first time in 2001. Seven years and more than $50 million in funding later, it has yet to start production of it silicon nanocrystalline ink. Until the company proves that its technology scales to large-volume production, it can neither make money through selling a lot of its product nor make a high-dollar exit. Since many VCs are looking for exits within five to seven years, seed-stage cleantech deals may not be for everyone.